India Edges Warily Toward Accepting More Chinese Investment

17 Sep 2024

(Nikkei Asia) — As Narendra Modi moves ahead with his third term as prime minister of the world’s most populous nation, there is growing recognition that his Make in India drive to transform the country into a global manufacturing powerhouse is not fully living up to expectations.

Despite showcase successes like Apple Inc.’s move to make its latest iPhone model in India, progress on targets for industrial investment, factory job creation and expanding manufacturing’s share of gross domestic product has lagged. While the government has offered production subsidies and protective tariffs, many companies have not boosted manufacturing capacity at a rate commensurate with India’s rapid economic growth.

Indeed, announced private investment in the April-June period fell to a 20-year quarterly low, according to economists at state-owned Bank of Baroda. In the fiscal year which ended in March, total foreign direct investment (FDI) dropped for the second year in a row.

For some voices inside and outside the Indian government, the solution is to allow more Chinese investment into the country.

Hundreds of proposals from Chinese companies such as electric-car maker BYD Co. Ltd. have been stalled or rejected by New Delhi in recent years amid a military face-off along the two countries’ frontier. The sheer volume of submissions, though, reflects the keen interest of Chinese businesses in building capacity in India at a time when others are hesitating and as they seek to diversify production away from their homeland due to trade tensions with the West and rising costs.

There are some signs the Modi government may be easing up on its controls on Chinese investment. In July, the Indian Ministry of Finance endorsed the notion of more Chinese investment in its annual economic review. A senior Commerce Department official then briefed reporters last month that some policy changes are in the works. Meanwhile, a number of long-pending investment proposals from Chinese companies, including one from Luxshare Precision Industry Co. Ltd., the second-largest assembler of iPhones, have quietly been approved in recent weeks.

“Money is available only in China, particularly for investment outside, and they have the companies that are looking for expansion also,” said N.R. Bhanumurthy, director of the Madras School of Economics in Chennai. “There is nothing wrong,” he said, in India widening its door to Chinese investment.

Yet this remains a highly charged question in New Delhi. Asked two weeks ago after a news conference about reports of the recent investment approvals, Commerce and Industry Minister Piyush Goyal told Nikkei Asia that there has been no rethinking of the government’s stance. “A report is just a report” until the government officially says otherwise, he said.

It is clear the Modi government has many considerations to weigh as it balances its desire to boost domestic manufacturing with avoiding increased dependence on China, which continues to press aggressive claims on Indian territory, including most of the state of Arunachal Pradesh.

“On the investments issue, I think, to me, it’s common sense that investments from China would be scrutinized,” said External Affairs Minister Subrahmanyam Jaishankar at an Aug. 31 conference. “I think the border and the state of relations between India and China call for it.”

“Let’s not make out as though it’s only India which has a China problem,” he added. “[Yet] India has a China problem, a special China problem that is over and above the world’s general China problem.”

A key dimension of India’s China problem is the massive trade imbalance between the two nations.

While bilateral trade rose 4% to $118.4 billion in the last financial year, the northbound component amounted to just $16.66 billion, or 14.1%, of the total. While India mostly imported manufactured goods from China, especially electrical equipment, its shipments north were predominantly commodities like iron ore.

By loosening up on Chinese investment, New Delhi might be able to chip away at its trade imbalance with Beijing, argues Indian Chief Economic Adviser V. Anantha Nageswaran, who authored the Finance Ministry’s annual review.

“We have a large trade imbalance with them, and it also means you are making yourselves vulnerable,” Nageswaran said at the report’s release. “Whereas if you balance, if you choose areas in which you can have investment inside the country, then you also have a chance of Indian entrepreneurs picking up the know-how and at one point also becoming self-sufficient.”

Until now, China has played a minor role in India’s foreign direct investment.

While India’s FDI figures are distorted by investment treaties that mean a disproportionate volume of inbound capital is routed through the island nations of Mauritius and Singapore, China ranked at just No. 32 among India’s FDI sources during the last fiscal year, with flows of only $42.29 million, according to the Indian Department for Promotion of Industry and Internal Trade data.

While Chinese inflows have been particularly meagre since New Delhi tightened controls on FDI from bordering nations in 2020, they were hardly robust before that, with China ranking No. 22 for cumulative investments since 2000.

Some Chinese companies have found success in India by joining hands with strong local groups to advance their ambitions. SAIC Motor Corp. Ltd.’s MG brand has become the second-biggest player in India’s electric vehicle (EV) market via a joint venture with local steelmaker JSW Group. Online fashion retailer Shein is now preparing to launch sales in India through a partnership with Reliance Industries Ltd., the country’s largest conglomerate.

Still, whether or not greater Chinese investment would boost exports to China, Nageswaran argues it would enable India’s overall exports to grow significantly.

“As the U.S. and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them,” the annual review he led said. “Focusing on FDI from China seems more promising for boosting India’s exports to the U.S., similar to how East Asian economies did in the past.”

Some Indian scholars believe increased Chinese investment could also help defuse political tensions.

“Obviously, China will remain the foremost security challenge for India, but if Chinese companies create large assets via investment in India and aid Indian economic growth, it might reduce the large uneasiness associated with the strategic asymmetries between India and China,” said Prerna Gandhi, an associate fellow at the Vivekananda International Foundation, a New Delhi-based security think tank.

Last month, New Delhi moved to address complaints from Chinese and non-Chinese companies about the difficulty of arranging visas for Chinese technicians dispatched to train local workers by launching a dedicated online portal for application processing.

“It has been really difficult to apply for work visas for our Chinese colleagues,” said a supply chain manager at a company involved in the production of Google smartphones in India. “Very often applying for 10 people would only get five visas.”

Yet the notion that Chinese investment might reduce New Delhi’s trade deficit with Beijing is undercut by expectations that Chinese companies opening factories in India will seek to import industrial inputs from their homeland.

“The point is that in trade, you are dependent upon all the countries in the value chain,” said Commerce Secretary Sunil Barthwal last month. “So as long as you are part of the value chain, there will be imports, there will be exports. … When we export more, obviously it will require more inputs.”

Moreover, even scholars who endorse the notion of more Chinese investment argue that New Delhi has to be selective about which industries to open up. “There should be some strategic investments that will support India’s sectors like EVs and the chip industry,” said Bhanumurthy of the Madras School of Economics.

New Delhi’s rethinking of economic links with Beijing since border clashes in 2020 has extended well beyond FDI. Companies including phone-makers Xiaomi Corp., Oppo Co. Ltd. and Vivo Mobile Communications Co. Ltd. have been targeted in tax and customs evasion probes. Over 200 Chinese phone apps, including popular social platforms TikTok and WeChat, have been banned. New Delhi has declined Chinese calls to resume direct flights suspended amid the Covid pandemic. Any revived exchange of media correspondents remains on hold too.

Wariness in India of China’s intentions thus makes some observers question the potential benefit of more investment.

Skeptic Ajay Srivastava, founder of the Global Trade Research Initiative in New Delhi and a former government trade negotiator, queries China’s willingness to allow significant transfers of industrial know-how.

“Allowing Chinese firms to ‘Make in India’ risks overwhelming domestic industries, potentially leading to the closure of many Indian businesses,” he wrote in a rebuttal to Nageswaran’s review. “Dependence on Chinese firms for key manufacturing capabilities could expose India to supply chain vulnerabilities and geopolitical risks.

“The worst outcome will be psychological: India will lose its confidence in manufacturing,” said Srivastava, arguing instead that New Delhi should pursue deregulation and lower operating costs to boost industrial production. “We need to reduce business costs at every step, from start to port, and improve infrastructure and ease of doing business.”

Economist Ashwani Mahajan, national co-convenor of the Swadeshi Jagran Manch, a self-reliance movement indirectly linked to Modi’s Bharatiya Janata Party, argues that looking inward is a better choice than either Chinese investment or Chinese imports.

“When there are two bads, why choose any one of them?” he said. “The idea is we should stick to our [self-reliant India] plan. Whether it is defense, digital economy, telecom, or electronics, India is doing well in every sector.”

All in all, New Delhi is unlikely to make more than “tweaks here and there” to its policies on Chinese investment while prioritizing national security measures in the medium term, said Harsh V. Pant, a professor of international relations at King’s College London.

“One of the lessons that I think has been learned is that it can be very harmful or disadvantageous for India to have blanket endorsement of China’s role in [the] Indian economy,” he said. “Unless India continues to grow economically, unless India develops its own manufacturing base, it would be very difficult to deal with China on a long-term basis.”

This story was first published in Nikkei Asia.